Investment Adventures in Emerging Markets

Wedding Bells in Romania

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I was invited to attend the wedding of one of our Romanian staff in June, and I jumped at the opportunity to celebrate with the happy couple, visit a different part of Romania, and talk to locals about life there. The celebration represented a microcosm of the juxtaposition of old and new in Romania, and this is similar for investors there as progress continues toward market reform.

We flew into Romania’s Cluj Napoca Airport; Cluj Napoca is the capital of Cluj County. Zalau, our ultimate destination, is the capital of Salaj County. Both are in the Transylvanian region that borders Hungary and Ukraine. I wondered why we couldn’t fly into Zalau directly, and later found out that although there was an air strip there, the land on which it was built (during the Ceausescu Communist period) was reclaimed by its former owners and had to be given up. Today it’s just a field. So, we drove from Cluj Napoca to Zalau. Winding roads took us through lush green, mountainous terrain with farms on the low lying plains sandwiched between the peaks. I could understand why at one point there was a substantial wood furniture industry in the area, given the abundance of forests.  

Driving into Zalau, there were some derelict buildings but strikingly, we also saw a huge number of newly constructed houses and apartment buildings. I was therefore shocked to learn that the population was just over 50,000. It seemed like each of those 50,000+ people had an apartment or house of their own given the number of buildings in the city! 

Before the wedding, we took a tour of the city and saw a cathedral and some churches, and had some lively discussions with our driver about life there. Our driver told us that he spoke two languages, Romanian and Hungarian, since so many inhabitants in the city were Hungarians. I corrected him that he actually spoke three languages since his English was pretty good, but he was too modest to agree. 

Entering the industrial zone, the first large factory we saw was derelict. The driver said it had been a textile factory but it closed down due to Chinese competition. Then, we came to a very large truck tire factory, part of a French tire giant’s worldwide network. It spanned many city blocks and now hums 24 hours a day with three worker shifts. We also saw an oil and gas pipe factory, which looked rather modern with a new building under construction. This was part of a global network of an Argentine firm.

Passing the industrial zone, we saw two high chimneys in the distance. It was the city’s power station which produced not only electricity but also steam and hot water for winter. Gas came from local sources but also from Gazprom in Russia, an inheritance from the Communist era. But it’s not cheap. To heat a big house, we were told, would typically cost the average Romanian about US$400 per month during winter months. 

Merging Old Traditions and New Development

This was the second wedding I had attended in Romania and I had a wonderful time. The musicians were quite talented. Their infectious tunes had the most complex riffs I have ever heard, inspiring us to get up and dance. There were also traditional folk dancers in native costumes doing incredibly complex steps and jumps.  Apropos of how tradition and modernism mix in Romania, there was a modern band playing all the great western hits too. During the traditional music sessions, a famous deep baritone sang songs about life and love with lyrics (translated for me by my dinner table neighbour) that would put any poet philosopher to shame. “Remember that you’re just a guest in this world; you can have the world at your feet and countless riches, but don’t forget you are not immortal…..”   

On our drive back to Cluj, we passed old traditional villages where women were heading to church draped in black, wearing head scarves. Some were holding umbrellas to shade themselves from the bright sun. Orthodox churches with shiny silver domes and roofs dotted the countryside like beacons among the surrounding dark brown wooden houses capped with weathered maroon tiled roofs. We also spotted livestock grazing in the fields. We were told one of the main sources of milk and farm plough power had been the traditional dark brown cows, but today, Chinese-made tractors and store-bought milk were taking their place. In the town there were a few modern Western European grocery outlets, a sign that modern food distribution has reached the farthest reaches of the country.

Working Toward Reform

Reform and change is not always a smooth or easy process, as old ideas with deep roots can take time to reseed. On the economic front, a recession in the Eurozone has weighed on Romania, but growth is currently projected to be positive there this year (the IMF forecast is 1.6%1and various forecasters expect it to improve further in 2014. Romania’s central bank has done its part to help stimulate growth by cutting its benchmark interest rate to an all-time low of 5% in July, which could help businesses. It is particularly worth noting that Romania has been one of the most successful countries in implementing macroeconomic reforms recommended by the IMF post-2008 financial crisis, despite the various challenges that reform measures usually bring. The country has managed to significantly reduce its budget deficit to less than 3% in 2012, and the current account has recorded a surplus so far this year. It is also encouraging that the government is not planning to slow this progress and is aiming to conclude a new IMF stand-by agreement in order to continue with much needed structural reforms, including that of state owned enterprises. If successful, we think Romania could become one of the fastest growing economies in the EU. The key, of course, will be the ability of the country’s government to implement the necessary reforms.

While recognizing the constant efforts made by authorities to stabilize the country’s macroeconomic indicators, we think Romania still needs to further reform to remain competitive and reignite growth. From our point of view, more privatization is needed as the state still maintains majority ownership in many sectors of the economy which are in need of investment that cannot be financed by the state budget alone. Another important step to further strengthen Romania’s competitiveness is a robust pipeline of IPOs that should help boost the underdeveloped local capital markets and provide financing for necessary investments. At the same time, the continuation of structural reforms and restructuring of state-owned enterprises is essential for consolidating the  results achieved until now, which we believe  in turn help to reaffirm Romania’s position as an attractive destination for foreign investments.

1. Source: © 2013 International Monetary Fund, World Economic Outlook, April 2013.

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